slides_2017_l920170831115123.pdf

slides_2017_l920170831115123.pdf - Testing the CAPM Carlo...

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Testing the CAPM Carlo Favero Favero () Testing the CAPM 1 / 7
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Testing the CAPM The time-series performance of the CAPM is questioned by the significance of the alpha coefficients. (consider for example the case of the 25 FF protfolios) We also know that other factors beside the market are significant in explaining excess returns Fama-Mac Beth propose to exploit cross sectional information to produce a different test of the CAPM Favero () Testing the CAPM 2 / 7
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Fama-MacBeth(1973) Consider the 25 portfolios and run for each of them the CAPM regression over the sample 1962:1 2014:6. These regressions deliver 25 betas. ° r i t ° r f t ± = α i + β i ° r m t ° r f t ± + u i t Take now a second-step regression in which the cross-section of the average (over the sample 1962:1-2014:6) monthly returns on the 25 portfolios are projected on the 25 betas: r i = γ 0 + γ 1 β i + u i Under the null of the CAPM i) residuals should be randomly distributed around the regression line, ii) γ 0 = E ² r f ³ , γ 1 = E ² r m ° r f ³ Favero () Testing the CAPM 3 / 7
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Fama-MacBeth(1973) Favero () Testing the CAPM 4 / 7
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